Ratio Analysis and Interpretation

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Theresa Perkins
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1 Ratio Analysis and Interpretation 1. Following is the Balance Sheet of Ronald Ltd. Liabilities Assets Equity share capital 6% Preference share capital 7%debentures 8%Public deposits Bank overdraft Creditors Unpaid dividend Outstanding Expenses Reserves Provision for tax Profit & loss Account 7,000 1, Cash in hand Cash at bank Bills receivable Advances Furniture Machinery Land & Building Goodwill Preliminary Expenses Calls in Arrears in Equity Shares 2, 5,67,000 5,67,000 Balance Sheet as on 31 st March, 2014 Convert the above balance sheet in vertical form and calculates (1) Current Ratio (2) Quick ratio (3) Proprietary Ratio (4) Capital Gearing Ratio (5) Working Capital ratio. Give your comments. 2. Following figures have been extracted from the books of voodoo Ltd. Particulars Particulars Land and Building Plant And Machinery Equity Capital Preference Capital Cash and Bank You are required to_ 6,00,000 2, 5 a) Rearrange above figures in the vertical form and Misc. Current Assets P & L Account General Reserves Sundry Creditors Bills Payable Misc. Current liabilities Debentures b) Calculates_ (a) Debt_ Equity Ratio (b) Proprietory ratio (c) capital gearing ratio. 80,000

2 3. X Ltd. and Y Ltd. are in the same line of business. Following are their Balance Sheets as on 31 st March 2014 Liabilities Equity Shares Capital Reserve & surplus 12% Debentures Creditors Bills payable Proposed dividend Provision for Tax X ltd. 7,00,000 1, 3 X ltd. Assets X ltd. Y ltd. Land Building Plant & Machinery Cash & bank 2, 2, 5 80,000 3,00,000 1, 12,1 9, 12,1 9, You are required to rearrange the Balance sheets (in Vertical form) and calculate the following Ratios for both the companies and comment thereon (any three) (a) Proprietory ratio, (b) Capital gearing ratio, (c) Current ratio, (d) working capital ratio. 4. Following is the summary Balance Sheet of Star Products Ltd.: Liabilities Equity shares Capital General Reserve Securities premium 10% Debentures Profit & loss account Sundry Creditors Bank overdraft Provision for taxation Proposed Equity Dividend As on ,00, , 7, 2, 3,9 1,80,000 1, Assets Fixed Assets Investments Sundry debtors Prepaid Expenses Advance income tax Cash and bank Balances Share issue Expenses Preliminary Expenses As on ,00,000 8, 78, , 32, You are required the following ratios and give your comments on each ratio with reference to standard ratio (1) Current Ratio (2) liquid ratio (3) proprietory (4) - working capital ratio. Preparing Balance sheet in vertical form is not required. 5. The summarised final accounts of two companies are as follows: Liabilities X Ltd. Y Ltd. Balance Sheet Assets X Ltd. Y Ltd.

3 Share Capital Reserves 8% Debentures 88,000 42, ,000 35,200 2 Fixed Assets Current Assets Less : Current Liabilities 1,21,000 1,25,400 93,500 96,800 1,03,400 5 Particulars Sales Less : Cost of Sales Gross Profit Less : Operating Expenses Net profit before Tax Less : Tax Profit after Tax Less : Dividend Retained Earnings Revenue statement for the year X Ltd. 3, 2,37,600 92,400 63,800 28,600 12,100 16,500 8,800 Y Ltd. 2,64,000 1,98,000 66,000 44, ,240 12,760 6,600 7,700 6,160 You are requires to calculate the following ratios & comment. (1) Proprietory ratio. (2) Capital gearing ratio. (3) Gross profit ratio. (4) Operating ratio. (5) Return on capital employed ratio. (6) Return on proprietor s equity ratio. (7) Expenses ratio. (8) Net profit ratio. 6. Following is the Balance Sheet of Bliss and Happiness Ltd., as at 31 st March, Balance Sheet as on 31 st March, 2013 Liabilities Assets Equity share capital General Reserve 10% Preference Capital 15% Debentures Trade Payables Bank Overdraft Provision for Tax 1,80,000 1, 1,2 18,000 Machinery Investments in trade Bills Receivable Trade Receivables Cash & Bank Profit & Loss A/c 2,96,000 1,1 1,01,000 49,000 38,000 14,000 6, 6, Sales for the year 7, 00,000; Gross profit rate 25% and opening stock is 1, 09,000. Profit before Tax for the year ending is 2,. You are required to compute the following ratio and comment on current ratio. a. Current ratio b. Acid Test Ratio

4 c. Turnover Ratio d. Capital Gearing Ratio e. Proprietory Ratio f. Debt Equity Ratio (Debt / Net worth) g. Return on Capital Employed Redrafting the given Balance Sheet in vertical format is not expected. 7. The following figures relate to the trading activities of Z Ltd., for the year ended 31 st March Particulars Sales Closing stock Purchases Loss on sales of Assets Advertising Rent Profit on sale of share Provision for Taxation Salaries Salesmen s Salaries Depreciation Sales Return Depreciation on Delivery Van Printing & Stationery Audit Fees Opening Dividend received on shares 10,57,000 4, 8,3 4 32,750 18, ,750 14,250 36,000 57,000 8,000 17, ,2 1 You are required to rearrange above income statement in vertical form and compute the following ratios. (a) Gross profit ratio. (b) Operating ratio. (c) Net operating profit ratio (d) Selling and distribution expenses to sales ratio (e) net profit ratio. 8. Following is the Revenue Statement of PRODENT ENTERPRISES : Trading, Profit and Loss Account for the year ended 31 st March, 2014 Particulars Particulars

5 To opening stock To purchases To carriage inward To office expenses To sales expenses To loss on sale of assets To net profit c/d 27,150 1,63,575 4, ,500 1,200 4 By sales By closing stock By interest received on investment 2,5 42,500 2,700 2,99,700 2,99,700 Calculate the following ratios: (a) Gross profit (b) Operating ratio (c) turnover ratio (d) Office expenses ratio (e) Net profit before tax ratio Give your comments on Operating ratio only. Note: vertical revenue statement need not to be prepared. 9. Comment on the position of Commentary Ltd. from the profit and loss accounts and Balance Sheets after calculating following ratio : (1) Current ratio (2) Proprietory ratio (3) Debt-Equity ratio (4) working capital ratio (5) Liquid ratio (6) Cost of sales to sales ratio (7) Administrative exp. To sales ratio (8) Selling expenses to sales ratio Liabilities Assets Capital of 10 each Reserves Secured Loans Current Liabilities Provisions 80, ,000 54,000 68,000 24,000 5 Fixed assets Current Assets Loan & Advances 90,000 1, 5 9 1,1 2,5 2,44,000 2,5 2,44,000 Profit and Loss Account for the year Ended.

6 Particulars Particulars To opening stock To purchases To wages To factory expenses To administrative expenses To selling expenses To managerial remuneration To Tfd. To reserve To income tax To proposed dividend To balance c/fd. 44,000 84, ,000 6, , ,000 28,000 6,000 24,000 8,000 16,000 By sales By closing stock 2, 46,000 44,000 2,56,000 2,44,000 2,56,000 2,44, Profit & Loss A/c and Balance Sheet of SIDDHART LTD. for the year ended 31 st March, 2014 : Trading Profit & Loss Account for the year ended 31 st March, 2014 Particulars Particulars To opening stock To purchases To wages To Gross profit c/d To salaries To rent To miscellaneous expenses To selling expenses To depreciation To interest To provision for tax To net profit c/d 5, 2,14,000 1,56,000 9,80,000 26,000 1 By sales By closing stock By gross profit b/d By interest on investment 9,00,000 80,000 9,80,000 1,56,000 1,61,000 1,61,000 Balance Sheet as on 31 st March, 2014 Liabilities Assets

7 Equity share capital ( 10) 8% preference share capital ( 100) Reserve and Surplus 10% Debenture Bank Loan (payable after 5 years) Creditors Provision for Tax (C.Y) Bank Overdraft Proposed Pref. Dividend 1, 6 8,000 Fixed Assets 1, (-) Depreciation Investment Debtor Bills Receivable Cash Preliminary Expenses 1, 80, , 5, Note: market value of equity share is 12 and Dividend paid per equity share is 2. Calculate the following ratio: (a) Acid test ratio (b) Capital gearing ratio (c) Operating ratio (d) Dividend payout ratio (e) Debt service ratio (f) Creditors turnover ratio (g) turnover ratio 11. Pawan Ltd. Has the following trading and profit and loss account for the year ended 31 st March, 2014 and Balance sheet as at that date. Trading and Profit and Loss Account for the Year ended 31 st March 2014 Particulars Particulars To opening stock To purchase credit To carriage inward To gross profit c/d To administrative expenses To selling expenses To depreciation To interest To income tax To net profit c/d 3, 16, 8,00,000 By sales Cash 6,00,000 Credit 2 By closing stock 30,00,000 30,00,000 33,00,000 33,00,000 1,9 94,000 1, 2,5 By gross profit b/d By other income 8,00,000 18,000 8,18,000 8,18,000 Balance Sheet as on 31 st March 2014

8 Liabilities Assets Equity share capital ( 10) 10% preference share capital Reserves and surplus Long term loan Debentures Creditors Bills payable Accrued expenses Provision for tax 7,00,000 6,00,000 1, 1, Plant and machinery 20,00,000 Less : depreciation Goodwill Prepaid expenses Marketable securities Cash 1 2,80,000 3,00,000 1, 25, 25, The market price of the share of the company on 31 st March 2014 was Reserves at beginning 2,93,000 Net profit during the year 5,5 5,4 Interim dividend 1,4 Reserves at the close of the year Calculate the following ratios : (a) Return on proprietors fund (b) Acid test ratio (c) Inventory net current asset ratio (d) Capital gearing ratio (e) Debt service ratio (f) Creditors turnover ratio (g) Operating ratio (h) turnover ratio Note : No need to convert the statements into vertical form. 12. The following is the summarised balance sheet of M/s. Sambodh Ltd. as on 31 st March, Liabilities Assets

9 Equity share capital ( 10 each) 9% preference share capital ( 100 each) General reserve Profit and loss A/c 10% mortgage loan Accounts payable Advance from customers Provision for taxation Proposed dividend Goodwill Furniture and fittings Land and Building Cash and bank balances Prepaid expenses Preliminary expenses Discount on issue of debentures 1,2 3,00, , 12, The following further information is also given for the year : sales - 10,00,000/- Net profit rate 15% Out of total sales 20% are cash sales. Purchases - /- No. of days in a year 360 Calculate the following ratio : (a) Proprietory ratio (b) Capital gearing ratio (c) Acid test ratio (d) Operating ratio (e) Creditors turnover ratio Preparing balance sheet in vertical form is not expexted. 13. Following Financial Statement of JAY Ltd. are given to you. Preference dividend was 4,800. Equity dividend was 19,000. Rearrange them into vertical form and compute all possible ratios Trading and Profit and Loss A/c for the year ended Particulars Particulars

10 To opening stock To purchases less returns To wages To salaries To office rent To interest To non-operating expenses To advertisement To transport on sales To net profit To income tax 4 2, 17,000 3,000 6,000 4,000 By sales By closing stock By non-operating income 9 1 5,07,000 5,07,000 Balance Sheet as on Liabilities Assets 12% preference share capital ( 10) Equity share capital ( 10) Capital reserve General reserve P & L A/c 10% Debentures Bank loan Creditors Bills payable Bank overdraft 1,90, Fixed assets : Original cost 2, Less : depreciation Investments (short term) Pre-paid expenses 1,90, , 4,

myepathshala.com (For Crash Course & Revision)

myepathshala.com (For Crash Course & Revision) 14.1 Introduction of Chapter 14.2 Liquidity Ratios (Formulas) Chapter 14 Accounting Ratios 14.3 Liquidity Ratios (Questions) [Ill. 1, 4, 11, 20, 22] Ill. 1 From the following, compute the Current Ratio